“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, March 04, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Walt Disney Co (NYSE:DIS) Calls

Tuesday, March 05, 2019

** OPTION TRADE: Buy the DIS APR 18 2019 115.000 CALL at approximately $2.70. Place a pre-determined sell at $5.40.

Also include a protective stop loss of $1.05.

Walt Disney Co (NYSE:DIS) is one of the biggest brands in the world. It’s a leader in its industry, is a master of marketing, and has a multigenerational history of cultivating assets such as Disney princesses, a strategy that has helped solidify its industry dominance and created barriers to entry.

Disney is a global consumer-facing brand that has built its foundations on great products and great branding. Disney has a long history on the market and has been a big winner over that time. Disney is currently worth $168 billion, and offers modest dividend yields of 1.6%.

Disney is in the midst of one of the biggest strategic shifts in its history, and a year from now it will be in a much different place from where it was a year ago. The company is in the midst of closing on its acquisition of the entertainment assets of 21st Century Fox, after announcing the deal in December 2017. That acquisition will give it more firepower when it launches its own Disney+ entertainment streaming service later this year, which will complement the ESPN+ streaming service it introduced last year and now has more than 2 million subscribers. With the Fox acquisition, Disney will also gain 60% majority control of Hulu, effectively giving it a third streaming service.

Also, to address its infrastructure needs, Disney acquired a majority stake in BAMTech, which forms the technology backbone of Disney's streaming services. The BAMtech acquisition was a smart move because it would have been extremely difficult to build the technology infrastructure from scratch.

BAMtech is already running ESPN+, and it appears to be doing a great job. On its Q1 2019 earnings call, Disney noted that BAMtech was able to handle half a million customers signing up for ESPN+ in the same day. On that same call, CEO Bob Iger praised the platform's stability.

About Disney…..

Walt Disney Co., together with its subsidiaries, operates as a global diversified media and entertainment conglomerate.

Founded in 1923, Walt Disney Co. now operates with more than 200,000 employees across more than 40 countries.

They operate across the following segments: Media Networks, 41% of FY 2018 revenue; Parks and Resorts, 34%; Studio Entertainment, 17%; and Consumer Products & Interactive Media, 8%.

Past Performance…..

Disney lost over $1 billion in streaming from Hulu and ESPN+ in its fiscal 2018 but, as a company, still produced $10B in free cash flow and a net income of $12.6 billion for its fiscal year. That's very impressive. While analysts recognize these costly ventures, Disney has exceeded earnings estimates in three out of the last four quarters. In its most recent, it had an EPS of $1.84 versus the estimated $1.55.

Additionally, Disney's largest revenue streams, Media Networks and Parks, Experiences & Consumer Products were, respectively, up 7% to $5.9B and 5% to $6.8B. Disney's theme parks are now its biggest source of revenue and profit. This is not something that a streaming service like Netflix has, and is incredibly valuable. Eventually, Disney will be selling a movie ticket, a streaming service, an amusement park ride, a dining experience, hotel room, a toy, and so much more.

Future Earnings…..

Equities analysts forecast that Walt Disney will announce earnings of $1.65 per share for the current quarter. Two analysts have provided estimates for Walt Disney’s earnings. The highest EPS estimate is $1.78 and the lowest is $1.49. Walt Disney posted earnings of $1.84 per share in the same quarter last year, which suggests a negative year-over-year growth rate of 10.3%.

Also, equities research analysts forecast that Walt Disney will announce $14.45 billion in sales for the current quarter. Two analysts have issued estimates for Walt Disney’s earnings, with the lowest sales estimate coming in at $14.37 billion and the highest estimate coming in at $14.53 billion. Walt Disney posted sales of $14.55 billion during the same quarter last year, which indicates a negative year over year growth rate of 0.7%.

The company is scheduled to report its next earnings report on Tuesday, May 14th.

Moving Forward…..

Disney is expecting a big year when it comes to film releases. And while the analysts may short-change some of these films, remember that these are the guys that didn’t see Black Panther being that impactful when it ultimately went on to become one of the most successful movies of all time.

Here’s what we’re looking at 2019: Captain Marvel and live-action Dumbo in March, Penguins and Avengers: Endgame in April, and live-action Aladdin in May. Toy Story 4 hits in June, The Lion King in July and Frozen 2 in November. And what better way to finish out the year than with Star Wars: Episode 9.

Simply put, the studio is going to crush it this year and Disney’s top and bottom line are going to feel a boost as a result.

A strong economy will be very helpful to Disney. Family vacations to Disney parks, splurging to lodge in the magical hotels and paying up for extra perks should help drive higher margins and revenue for Disney. The fact that attendance remains strong despite higher park prices will only drive up profits for the entertainment king.

But a strong economy translates to more than just park sales. It means more little kids dressing up as Avengers and Elsa from Frozen for Halloween. It means more toy sales — which also benefits Disney’s partner Hasbro (NASDAQ:HAS) — around the holidays and more outings to the theatre.

Influencing Factors…..

The Fox deal should make Disney an even more formidable player at the box office as it gains control of several studios, including the critically acclaimed Fox Searchlight and the company gets a brand new set of intellectual property to build on, which will make its streaming platform even more attractive to potential subscribers. This transition comes as profits in Disney's media networks division, its biggest segment, have been steadily falling, declining 4% last year as cable subscribers cut the cord and ad rates fall at ESPN and other marquee properties.

The company has warned that its streaming investments will be costly at first, but they should eventually pay off. And in the meantime, Disney has several big-budget movies on the way, including more Star Wars titles, a Black Panther sequel, a live-action Aladdin, and the new Lion King. And of course, it also has a thriving theme-parks business that delivers steady growth each year.

Disney owns an unrivaled selection of valuable media properties, and that advantage has become even more pronounced following its $71 billion deal to buy Twenty-First Century Fox franchises, studios, and channels. The House of Mouse has also set the standard for leveraging entertainment assets across business channels, and it looks poised to retain a forefront position in the entertainment space as it continues to put its incredible franchise catalog to work across its core businesses and expands into new offerings like streaming.

The company's media networks have been facing pressure due to cord-cutting and rising content costs, but the segment still does impressive business, accounting for $6.6 billion of the company's $15.7 billion in operating income last year. Strong performance from the company's parks and resorts and movie segments is helping to pick up some slack in the land of TV, and the stock continues to have substantial upside potential as it trades at roughly 16 times the year's expected earnings.

Analysts Opinions

Edward Jones upgraded shares of Walt Disney from a “hold” rating to a “buy” rating in a research report on Wednesday, February 13th.

Also, Tigress Financial restated a “buy” rating on shares of Walt Disney in a report on Tuesday, February 12th.

Several equities analysts have recently commented on the company…..

  • Zacks Investment Research raised shares of Walt Disney from a “sell” rating to a “hold” rating in a research note on Thursday, January 17th.
  • BMO Capital Markets upped their price target on shares of Walt Disney from $109.00 to $114.00 and gave the company a “market perform” rating in a report on Thursday, February 7th.
  • Finally, B. Riley reiterated a “neutral” rating on shares of Walt Disney in a report on Friday, November 9th.
  • Loop Capital lifted their target price on Walt Disney to $130.00 and gave the stock a “buy” rating in a research note on Friday, November 9th.
  • Argus boosted their price objective on Walt Disney from $129.00 to $135.00 and gave the stock a “buy” rating in a research note on Monday, November 12th.
  • Finally, Credit Suisse Group reaffirmed a “hold” rating and issued a $114.00 target price on shares of Walt Disney in a research note on Tuesday, January 22nd.

Two research analysts have rated the stock with a sell rating, three have assigned a hold rating and twelve have assigned a buy rating to the company’s stock. Walt Disney presently has a consensus rating of “Buy” and a consensus target price of $125.84.     

Summary

Walt Disney Co has a twelve month low of $97.68 and a twelve month high of $120.20. The stock has a market capitalization of $169.96 billion, a PE ratio of 16.15, a PEG ratio of 2.76 and a beta of 0.96. The company has a current ratio of 1.00, a quick ratio of 0.92 and a debt-to-equity ratio of 0.32.